German economics during the First World War

Samuel Dunkelberg

History and Anthropology

November 10, 2016

Abstract:

The finance policy of the Germans during WWI has been reported to be unsuccessful and

accountable for the hyperinflation after the war. But the purchase of war loans by the people

through 1918 proves that it was in some way successful. Nevertheless, Germany's institutions

with high-risk factor were employed by them. This is what built the potential for inflation; this

potential was realized after 1918 as an outcome of high amendments and policies of the German

leaders. The substantial legacy of the German war finance was to quicken the conversion from

gold to fiat money.

Introduction:

Wars result in a high expenditure by public and low private consumption. During the

WWI all the nations engaged in the war used a combination of taxation, inflation, local debt, and

lending overseas to finance the increase in public expenditure, the last three points being the

most emphasized. Germany wasn't the exception as well.1 Taxation, being the first policy is the

straightway of changing the course of resources to the public sector from the private sector. The

second is the printing of new money that devalues the currency is a non-straight way of carrying

of the same thing. The stocks of wealth that already exist in the private sector are degraded by

the printing of money, and it shifts resources to the state that can mint new money. The third

way, issuance of local debts, asks people to willingly give up their present consumption and

instead loan out their funds to the state for a specified time. Issuing of the debts, however, only

postpones the final retribution, since the state would pay back the loans by further increasing the

tax levels or destroy it by devaluing the currency. Finally, money from foreign nations and

1
Volker Rolf R Berghahn, Imperial Germany, 1871-1918: Economy, Society, Culture, and Politics (New
York: Berghahn Books, 2005).
institutions can be borrowed by the state, which adds to the country's stock of wealth

temporarily. Just like the local debt, the foreign debt also needs to be paid off by the rise in taxes

and debasing of currency.2

Before WWI, Germany had a good infrastructure, both industrial and economical, and

had ample amount of money produced since it was a freshly established superpower. Germany's

economy was very much based on agriculture with very little to no industrial power in

comparison to other European nations, i.e. Great Britain, etc, before the 1800s, however,

Germany began industrialization, and its economy shifted quickly from being agricultural to

industrial and by 1900, it had a larger economy as compared to the rest of European nations.

According to economists and historians, the main reason behind the quick economic

development of Germany was it being the largest steel producer in the late 1800s since steel was

the most important resource of that time.3

Financial Policies:

Germany's financial policies at the time of war have been judged quite negatively by the

scholars and coevals. Before 1914, many critics believed that the public finances of Germany

were too decentralized and unorganized to be able to fund a long war. Historians debate that the

considerable inflation and scarcity of goods during the war, also the hyperinflation in 1923 was a

2
Volker Rolf R Berghahn, Imperial Germany, 1871-1918: Economy, Society, Culture, and Politics (New
York: Berghahn Books, 2005).
3
Spiridon Paraskewopoulos and Eric Owen Smith, “The German Economy,” German Studies Review20,
no. 3 (October 1997), doi: 10.2307/1431406.
direct outcome of the Reichsbank and the Treasury's main financial policies during the war.4

Recent scholars that studied the war finance from a relative viewpoint see the German

mobilization in a relatively more favourable light, exemplifying the German policies to be

comparable to the Great Britain and France and more effective than the policies of the Ottoman

Empire, Habsburg, and Russia.5

Of course, the war finance of Germany was comparable to that of Great Britain and

France because all three of them relied very much on inflation and debt than relying on taxation

for the funding of Government's expenditure. These policies were successful in Germany if we

look into it from the perspective of war years. Germany's economy might have faced

inefficiencies that resulted due to the hidden inflation, but Germany's economy never went

through a severe breakdown. The war loans from Germany got more subscriptions that any other

war-ridden country. The allies of the country were even helped by the donations of gold and

through loans by Germany. The defeat of Germany in 1918 resulted due to the military and not

because of the financial causes.6 But if we view the financial policies from the view of the post-

war years, they look very problematic: The Britain and France did not experience hyperinflation,

but the Weimar Republic did. To what level this hyperinflation originated by the policies during

the wartime has been a repeated point of argument among the historians. If Germany's war

finance policies were similar in wide terms to that of Entente, muted but essential differences in

its taxation, its potential to release short-term debts in the money market, its reach to the foreign

investors, and the unusual establishment of Darlehnskassen, its loan bureau generated a

4
T. Balderston, “Strategies of Economic Order. German Economic Discourse 1750-1950,” German
History 15, no. 1 (January 1, 2007).
5
“WW1 Dentures Identified by BDA,” BDJ 218, no. 10 (May 22, 2015).
6
Spiridon Paraskewopoulos and Eric Owen Smith, “The German Economy,” German Studies Review20,
no. 3 (October 1997)
inflationary potential that was better and larger in Germany than its enemies in the West. The

inflationary potential of Germany turned into a reality; however, it was dependent on the after-

war policies primarily.7

Mobilizing for war:

The two decades before 1918, coevals, both, present in Germany and outside of it

believed that the Empire of Wilhelmine was not well prepared to fund a massive war. Sine

Germany had a federal system; Berlin's central government didn't have the ability to enforce

direct taxes, i.e. Income tax, which was the strongest strategy for the modern government to raise

government income. Only 14% of federal revenue was raised through direct taxes, most of them

were taxes imposed on inheritance and property. The rest of them came from indirect funds

raised by consumption tariffs and taxes. With the rise in military spending before 1918, the

consumer goods prices and tariffs got high, which made taxation a very volatile political

problem.8 Moving Germany to have a more advanced and centralized tax system was what the

Social Democrats wanted since they wanted to get rid of the high tariffs. In the meantime, the

states in the empire of Wilhelmine were enviously protective of the monopoly they possessed on

direct taxation. The constant and deep struggle of Germany on taxation gave a view of financial

weakness to its coevals.

The decades before 1918 showed that Germany wasn't exactly prepared to handle the

economic stress that comes along with war. Number one, liquidity issues were faced by the

7
R. F. Hopwood, “Mobilization of a Nationalist Community, 1919-23,” German History 10, no. 2 (June
1, 2002), doi: 10.1177/026635549201000202.
8
Harald Hagemann, “Germany After World War II: Ordoliberalism, the Social Market Economy and
Keynesianism,” HISTORY OF ECONOMIC THOUGHT AND POLICY, no. 1 (April 2013)
Reischbank. As per the rules it had to cover one-third of the paper money that was in circulation

with coinage present in its vaults. Even then the Reischbank's gold reserves were lesser as

compared to that of France; this resulted in it having lesser flexibility during the financial crisis.9

Amid the agitation of 1907 Germany's treasury - contrary to that of France's and British's - had

the need to sell bonds in the foreign capital markets, and amid the financial crisis of 1911

Berlin's money market was insecure to a fast withdrawal of foreign investments. This was

viewed as a financial weakness of Germany. The national debt of Germany, furthermore, grew a

lot quicker than that of Britain and France over the three decades that preceded.10

To fight the view of being financially weak, the president of Wermuth and Reichsbank

chased a program that lasted a decade to increase the gold reserve of Germany and to lessen its

dependency on overseas creditors. The first step that was taken was to abolish the need for banks

to deliver paper currency from gold by the Reischbank; this was a key rule of the gold standard.

Despite the fact that the Reischbank supported its responsibility to cover one-third of the

paper money that was in circulation with metallic money or foreign currency, the gold reserves

were no longer accessible to the public due to this new law. With the enforcement of this law,

Germany left the gold standard. 11

The bank laws of August 1914 conserved the pretence that the currency of Germany was

still backed by gold. This pretence was cultivated by Reischbank and most of the economists

from Germany with the hope that it will implant confidence in the German citizens for its

9
David Welch, Germany and Propaganda in World War I: Pacifism, Mobilization and Total War
(London, United Kingdom: I B Tauris & Co, 2014).
10
David Welch, Germany and Propaganda in World War I: Pacifism, Mobilization and Total War
(London, United Kingdom: I B Tauris & Co, 2014).
11
“WW1 Dentures Identified by BDA,” BDJ 218, no. 10 (May 22, 2015).
currency. But Germany was removed from the gold standards and created the potency for serious

inflation if it is used incorrectly when all four of the laws were taken together.12

Paying for the War:

After the liquidity crisis of 1914 had been managed, the Reischbank's officials and the

Treasury shifted their focus to the question the payment of the rising cost of war. It proved to be

difficult to raise funds from the new taxes and it turned out to be an unsuccessful strategy. At the

start, the Germany's authorities came to the conclusion to not continue pursuing the high taxes as

they believed that the war would be short.13 As the awareness of the German's long time coming

victory grew, and with the start of Germany's new and big weaponry campaign- 1916's

Hindenburg campaign- the one's in power of the Treasury tried to increase the taxes so that the

cost of the war could be covered. The finance minister, Siegfried von Roedern, introduced taxes

on coal, profits from war and a turnover tax. But he was unable to impose an income tax at a

federal level. Only small sums of money were raised from the taxes he did implement in

comparison to Germany's expenditure. The threat to the public peace made the imposition

substantial tax reform impossible. The new taxes were opposed by the federal states, and the

indirect tax on consumer goods was opposed by the Social Democrats. However, the war costs of

Germany that were covered by taxes were only slightly less than of those of the other war-ridden

nations, which was almost 18% for the Britain and almost 14% for the Germans.14

12
Mark Hewitson and M. Hewitson, Germany and the Causes of the First World War (the Legacy of the
Great War Series) (Oxford: Berg Publishers, 2004).
13
Volker Rolf R Berghahn, Imperial Germany, 1871-1918: Economy, Society, Culture, and Politics (New
York: Berghahn Books, 2005).
14
T. Balderston, “Strategies of Economic Order. German Economic Discourse 1750-1950,” German
History 15, no. 1 (January 1, 2007).
 Alternatively, Helfferich, Havenstein, and Roedern's strategy were to fund the expenses

of combat by the issuance of war loans to the general public. They were hoping that after the

victory, Germany would be able to charge the defeated nations for the damages, as it did in the

Franco-Prussian war, and the debt would be paid off by the money received. Continuously short-

term bills were released by the central government to raise quick cash; these bills were either

purchased by the Reischbank or by the private financial institutions is Germany. Long-term war

loans, 9 in total, were released every spring and fall to the general public, and the proceeds

gathered from them were used to pay off the short-term debt. Almost all social groups till 1918

were subscribed to these war loans that reflected Germany's victorious publicity of loans and the

trust the public placed in the government. Germany's debt massively increased similar to that of

its friends and foes during the war.15

In the second half of the war, Germany's annual deficit waved around 90% of the total

Government spending. Even then these deficits were only a little higher than those of France

(80%-85%) or Great Britain (70%-75%). At the end of the war, the public debt of all three of

them was comparable as a percentage of GDP.16

Germany played the role of a banker for all of its allies throughout the war. Three and a

half billion of credit was given to Empire of Habsburg during the war, the majority of which was

used by Vienna to finance the trade deficit that existed there. As a return, gold was demanded

from the Austro-Hungarian Bank by the Germans.17 In contradiction, Germany gave out gold of

800 million values to the Ottoman Empire, where species was the core channel of payment. The

15
David Welch, Germany and Propaganda in World War I: Pacifism, Mobilization and Total War
(London, United Kingdom: I B Tauris & Co, 2014).
16
Spiridon Paraskewopoulos and Eric Owen Smith, “The German Economy,” German Studies Review20,
no. 3 (October 1997), doi:10.2307/1431406
17
“WW1 Dentures Identified by BDA,” BDJ 218, no. 10 (May 22, 2015).
supply of gold was very important for the /Ottoman Empire for the purchase of supplies in the

boundary of the empire, where the native currency wasn't that valuable. The resources of

Germany were stressed due to the financial relations among the Central Powers. Even then

Germany was able to assist its allies, even if it was inept at times, marks that its financial system

didn't have a peril of collapsing during the war.18

Banking, the Money Market and the Monetization of German War Debt:

The main financial problem of Germany was the rise of spending by the public which

was caused by the Hindenburg program. By the end of 1916, in spite of the popularity of the war

bonds, Germany's expenditure was higher than what it was generating through the long-term

loans or taxation. After 1916, the short-term debt increased and when the war ended it grew to

more than 30% of the total debt of the Federal government. This is what created a potential for

inflation. Reischbank had to print more money to buy the remainder of any short-term debts

which were not bought by German Banks or the money market of Berlin. 19

The massive amount of new currency had still to be backed by the gold reserves at the

Reischbank. To adjust the rise in paper money, the German public was aggressively urged by

Helfferich and Havenstein to hand over the gold that they possessed over to the Reischbank to

grow its reserves and to restore the public's trust in the national currency. Specie was no longer

18
R. F. Hopwood, “Mobilization of a Nationalist Community, 1919-23,” German History 10, no. 2 (June
1, 2002), doi: 10.1177/026635549201000202.

T. Balderston, “Strategies of Economic Order. German Economic Discourse 1750-1950,” German

19

History 15, no. 1 (January 1, 2007).

in circulation around the end of 1916. This acquisition of gold wasn't even enough to cover the

paper money expansion.20

The western allies had the advantage to raise funds in the neutral markets; this option

wasn't available for Germany. All war ridden countries ran trade deficits when the war was going

on; they were involved in more importing and less exporting. The management of these trade

deficits was a continuous problem. To pay for the imports, France, Britain, and Germany, had to

sell their foreign assets that were privately owned. When these finished, Entente powers reaped

the benefits of being able to take loans out in New York to finance the deficits in trade, but

Germany didn't go with that option. US money market lent out around two billion dollars to

Entente and only 27-35 million dollars to the central powers, before it took part in the war.21

Entente, more prominently France, had the domination in the market of overseas war bonds in

Switzerland. Entente was able to reach out to the foreign resources and buy materials essential

for war outside of their boundary by raising funds abroad, something that wasn't possible for

Germany. During most of the war, France, Italy and Russia's trade deficits waved between 60-

80% of their imports, on the contrary, Germany's trade deficits were just 50%.22

The Consequences of German War Finance:

If we widely look into the financial policies, Germany's policies were not that different to

that of Entente. But if we look closely, we can see crucial differences that were the reason for the

creation of inflation potential than either of France and Great Britain. Great Britain relied more

20
“WW1 Dentures Identified by BDA,” BDJ 218, no. 10 (May 22, 2015).
21
Spiridon Paraskewopoulos and Eric Owen Smith, “The German Economy,” German Studies Review20,
no. 3 (October 1997), doi: 10.2307/1431406.
22
David Welch, Germany and Propaganda in World War I: Pacifism, Mobilization and Total War
(London, United Kingdom: I B Tauris & Co, 2014).
on taxation and less on debt than Germany. The London and Paris money markets absorbed more

of short-term floating debt by the government than that of Berlin money market. It was difficult

for Germany to raise funds overseas, its debt and the inflation that resulted by it was hooked in

the domestic economy. Finally, the loan bank's lied about the currency still being backed by the

gold even though it wasn't the case.23

In the end, The Germany's war finance bigger consequence was not hyperinflation but the

quick transition by it to fiat currency from specie. At the end of the war, Reichsbank collected all

the coinage that was in circulation. Due to this, the public became so used to of the paper

currency which wasn't thought of before August 1914. The gold-backed currency that Weimar

tried to bring back in 1920 had a very short life. Germany left the gold-standard with the arrival

of the Great Depression.24

23
Mark Hewitson and M. Hewitson, Germany and the Causes of the First World War (the Legacy of the
Great War Series) (Oxford: Berg Publishers, 2004).
24
Volker Rolf R Berghahn, Imperial Germany, 1871-1918: Economy, Society, Culture, and Politics (New
York: Berghahn Books, 2005).
 Bibliography

Balderston, T. “Strategies of Economic Order. German Economic Discourse 1750-

1950.” German History 15, no. 1 (January 1, 2007): 145–46.

Berghahn, Volker Rolf R. Imperial Germany, 1871-1918: Economy, Society, Culture, and

Politics. New York: Berghahn Books, 2005.

Hagemann, Harald. “Germany after World War II: Ordoliberalism, the Social Market Economy

and Keynesianism.” HISTORY OF ECONOMIC THOUGHT AND POLICY, no. 1 (April

2013): 37–51.

Hewitson, Mark and M. Hewitson. Germany and the Causes of the First World War (the Legacy

of the Great War Series). Oxford: Berg Publishers, 2004.

Hopwood, R. F. “Mobilization of a Nationalist Community, 1919-23.” German History 10, no. 2

(June 1, 2002): 149–76. Doi: 10.1177/026635549201000202.

Paraskewopoulos, Spiridon and Eric Owen Smith. “The German Economy.” German Studies

Review20, no. 3 (October 1997): 483.

Welch, David. Germany and Propaganda in World War I: Pacifism, Mobilization and Total

War. London, United Kingdom: I B Tauris & Co, 2014.

“WW1 Dentures Identified by BDA.” BDJ 218, no. 10 (May 22, 2015): 559–59.